World Economic Outlook

Hopes, Realities, Risks

Global economic prospects have improved again, but the bumpy recovery and skewed macroeconomic policy mix in advanced economies are complicating policymaking in emerging market economies. Chapter 3 examines the prospects for inflation, particularly because inflation was remarkably stable in the wake of the Great Recession and, in fact, has become less responsive to cyclical conditions. Chapter 4 examines whether today’s fast-growing, dynamic low-income countries are likely to maintain their momentum and avoid the reversals that afflicted many such countries in the past.

Peak Effect of U.S. and European Policy Uncertainty Shock on Real GDP, Consumption, and Investment in Other Regions

Chapter 3: The Dog That Didn't Bark: Has Inflation Been Muzzled or Was It Just Sleeping?

This chapter finds that inflation expectations have remained strongly anchored to inflation targets during the Great Recession and the sluggish recovery. Long-term inflation expectations in advanced economies remain close to targets despite wide variation in actual inflation rates. Even in Japan, expectations remain close to the 1 percent target announced in February 2012 despite a prolonged period of deflation. Furthermore, coincident with greater central bank credibility, this anchoring is found to have increased over time.

Chapter 4: Breaking through the Frontier: Can Today's Dynamic Low-Income Countries Make It?

The chapter compares this recent wave of dynamic LICs with the previous wave, primarily dynamic LICs in the 1960s and 1970s, and finds: Important similarities: Both achieved stronger investment rates and export growth than LICs that were unable to takeoff. Striking differences: Today’s dynamic LICs sustained growth with much lower economic vulnerabilities than dynamic LICs in the past. This reflects in part greater reliance on foreign direct investment than on debt-financed investment, as well as faster implementation of structural reforms.